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Financial Planning – Mr. Yates
• In this world nothing is certain but death
  and taxes. - Benjamin Franklin
 Taxes in the New World…
• The Massachusetts Bay Colony in 1643 was the first to
  impose income taxes.
• From 1791 to 1802, the United States government was
  supported by internal taxes on: distilled spirits,
  carriages, refined sugar, tobacco and snuff, property
  sold at auction, corporate bonds, and slaves.
• The high cost of the War of 1812 brought about the
  nation's first sales taxes on gold, silverware, jewelry,
  and watches.
• In 1817, however, Congress did away with all internal
  taxes, relying on tariffs on imported goods to provide
  sufficient funds for running the government.
Income Taxes!
• In 1862, in order to support the Civil War effort,
  Congress enacted the nation's first income tax
• It was a forerunner of our modern income tax in
  that it was based on the principles of graduated
  taxation and withholding income at the source.
• During the Civil War, a person earning from
  $600 to $10,000 per year paid tax at the rate of
• Those with incomes of more than $10,000 paid
  taxes at a higher rate. Also sales and excise
  taxes were added.
16th Amendment
• In 1913 the amendment passed and
  allowed Congress to impose an income tax
• This was the year zippers were invented,
  and Cracker Jacks put toys in their boxes
• The tax was 1% on an income greater than
• Only about 1% of the population had to pay
Taxes rollin’ in
• In fiscal year 1918, annual
  internal revenue
  collections for the first time
  passed the billion-dollar
  mark, rising to $5.4 billion
  by 1920.
• With the advent of World
  War II, employment
  increased, as did tax
  collections—to $7.3 billion.
Graduated (Progressive) Taxes
• Our present tax system is a progressive,
  or graduated tax – increased income
  means increased taxes
For instance…
• A married couple
  making $70k combined
  would fall into the 25%
  tax bracket
• However, the total $70k
  isn’t taxed, the
  difference between their
  income and
  deductions are taxed
Exemptions & Deductions
• Exemptions – the IRS-allowed reduction
  in your income – you are given 1
  exemption for yourself, spouse, and each
• Deductions – expenses that reduce
  taxable income
• Standard Deduction – a set deduction
  allowed by the IRS, no matter what your
  expenses actually were
Back to our couple…
• Our married couple ($70k) has 3 children –
  hence, they receive one tax exemption for
  each person in the family $3,050 x 5
• They take the standard deduction (which
  turned out to be more than their itemized)
  of $9,500
• So – they have $15,250 + $9,500 =
  $24,750 in deductions and exemptions
• So their taxable income is only $45,250
So what do they pay?
• Taxable income of $45,250 –
  does that mean they pay 15%
  of that whole amount to Uncle
• No, they pay 10% on the first
  $14k, and 15% on the next
• Hence, (before any credits)
  they are forecasted to pay
  $6,887.50 (Federal Tax Only)
So that’s all they pay?
• Well, in addition to Federal Taxes, there’s
  also State Income Taxes, Social Security
  Taxes, and in some cases City Taxes.
• So let’s assume you lived in NYC –
  – a marginal tax rate of $25%,
  – State income tax of 4.75%
  – City income tax of 2%
  – Social Security of 7.65%
  – For a grand total of 39.4% in taxes
Capital Gains Taxes
• Almost any asset you own (except for certain
  business assets) is called a Capital Asset.
• A Capital Gain is what you make if you sell a
  capital asset for a profit
• A Capital Loss is when you lose money on that
• Example: if you owned 100 shares of GM stock at
  $50/share and sell them 2 years later when they
  were at $70/share ($2,000 capital gain)
• You will pay Capital Gains Taxes on that profit
  (which varies by your income bracket)
More on Deductions
• Deductions are itemized such
  – Medical and Dental Exemptions
  – Home Mortgage and Investment
    Interest Payments
  – Gifts to Charity
  – Casualty and Theft Loss
  – Miscellaneous – such as work
• Tax Credits offset your taxes in a   Credits
  dollar-for-dollar manner. They
  don’t reduce your taxable income,
  they offset taxes.
• Examples:
• Child credit - $1,000 per child
  under 17
• Education - $1,000 off your
  college expenses 50% off your
  next $1,000 for a total of $1,500
  knocked off your taxes
• Earned income, child and
  dependent care, adoptions, etc.
Speaking of breaks…

• More than 60% of all U.S. companies paid no
  federal tax at all during the boom years of 1996
  to 2000, the General Accounting Office reports.
• In 2000 alone, 94% of all U.S. corporations paid
  less than 5% of their total income in corporate
  taxes, according to the GAO
• Among the largest corporations -- the 1% of all
  corporations that own 93% of all corporate
  assets -- 82% paid less than 5% of their income
  in taxes.
Right in our backyard…
• Companies with a presence in Oregon, including
  Verizon, AT&T, and Boeing, were among the
  companies paying next to nothing or receiving
  rebates in 2001 through 2003.
• 2/3 of Oregon's corporations pay Oregon's $10
  corporate minimum tax.
• In 2003, the average American taxpayer paid
  more federal income taxes than AT&T, Time
  Warner, and Walt Disney combined.
• Who picks up the slack?

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